- Hi, Clint Coons here with Anderson Business Advisors.
And in this video, we're going to discuss Airbnb investing.
Alright, let's get started.
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Okay when it comes to investing in Airbnb, there's a lot
of confusion out there because everyone talks
about using limited liability companies
when it comes to owning real estate.
And if you watch some of my other videos on LLCs,
and believe me there's a lot of 'em out there,
you'll notice that I talk about
the importance of having the limited liability company
from an asset protection perspective.
And LLCs are the workhorse for real estate investors.
However, when it comes to structuring your business,
especially your Airbnb, we have to think outside of the box.
We have to get a little more creative.
Remember, this is not a one size fits all approach
when it comes to investing.
So many investors make that common mistake.
They think all they need to do
is create that LLC and I'm golden.
Well, that means you're only focusing
on the asset protection leg of your investing plan.
When it comes to Airbnb investing, you also need
to pay attention to taxation.
Because this can come up and really hurt you
and really take away from the amount of money
you're generating from your Airbnb income if you're not
conscious of how taxes will affect the income
you're generating from this tremendous opportunity.
So, what am I talkin' about?
Well, most people when they look at investing in Airbnb,
what they're gonna do is go out
and create a limited liability company.
And that's right.
You wanna do that.
So you got an Airbnb property.
You will set up an LLC right here.
So here's my LLC.
And I will place my property
into this limited liability company.
Now, the mistake you're gonna make is that if you intend
to engage in Airbnb out of this LLC,
you're gonna run into some serious problems come tax time.
Cause Uncle Sam's gonna want a bigger cut of your income.
Because when you're engaging in Airbnb with an LLC,
let's say you're down here.
And I assume you've set this up
as a disregarded entity or a partnership
cause you'd never wanna have a corporation owning this.
Because there's negative tax consequences by having this
in a c-corp rental property cause when you later sell it,
you're gonna miss out on the long-term capital gain.
So, let's assume it's setup as a
partnership or disregarded entity, which means
everything flows down to you.
Now as a result of that structure, then the activity
that takes place up here in the LLC is attributed to you
as if you did it in your own name.
So for example, if we didn't have real estate
inside of this LLC, let's assume
that I was running an asphalt business.
Well that's an active business, right?
So if you have an LLC setup that's a disregarded entity
or a partnership of which you're involved with,
then the income or the activity that takes place up here
is attributed to you as an individual
as if you were doing it in your own name.
So essentially the IRS looks at you as a sole proprietor.
So if the LLC is engaged in an active business
and it distributes to you money from that business,
then that money is considered to be active income to you.
Which means it's subject to your ordinary income tax rate,
plus you have to pay employment taxes on it.
15.3% on top of the income
you're already paying ordinary income tax on.
So, how does this apply to Airbnb?
Well Airbnb or short-term rentals
is considered an active trader business.
So income that comes from this activity
is going to be subject to employment taxes
when you have it setup in this flow through manner.
Now I've met numerous Airbnb investors
that were shocked to discover this.
I mean they've been makin' really good money.
80, 100, $150,000 a year
and not paying employment taxes on that income.
They thought it was all just ordinary income
from their investing.
They were treatin' it like their other rentals.
Well that's not the case.
And I said it's just only a matter of time
until you get audited and the IRS will recharacterize
that income and tag you with that additional 15.3%.
So, what do we need to do then?
Set-up the structure like this,
so you obviously wanna protect your property.
That's very important.
So we will create an LLC.
Typically I'll have this LLC setup as a partnership
if there's more than one individual.
Or it'll be a disregarded LLC.
Alright now remember.
I just told you somethin' about that.
It's not going to apply in this context.
So you don't have to worry about the employment taxes
cause we're gonna do some magic here
with the way we set this up.
So we're gonna own the property
in the limited liability company for asset protection.
That's why we're doing that.
Now, we're going to create a second entity up here.
Here I'm going to create a c-corporation up here.
In that company I will own.
So and I'll be an officer of that company.
So I'll run it.
And I'm the shareholder down here.
So I'm gonna run that company.
Now the c-corporation is going to enter
into a master lease agreement with this LLC.
Another way I could say that is that your LLC
is going to lease property to your corporation.
And the property it's gonna lease is this one right here.
So we're gonna lease it.
We're gonna lease that property up to that c-corporation.
So let's assume that your Airbnb property,
you're calculating it's gonna generate $7,000 a month
in Airbnb short-term rental income.
So if I know that I'm gonna generate 7k a month,
if I ran it all through this LLC.
Just take 7k times 15% and that's how much additional tax
you'd have to pay on that money you're generating.
So that'd be about $1,000 in additional income taxes
I'd be paying if I ran it down here.
I don't wanna do that.
I wanna put some tax savings into my pocket.
I don't wanna be paying an extra $1,000 a month.
So what I'm gonna do is I'm gonna enter into this
lease agreement where my LLC agrees to lease the property
to the corp for $5,000 a month.
So I'm gonna lease it at 5k.
And then the corporation is gonna turn around
and release it back out on a short-term basis.
So all the people that come there
are gonna be paying the corporation.
So the corporation makes $7,000 a month.
It turns around and has a $5,000
a month payment back to the LLC
because it's leasing the property to the LLC.
Another way to say it is that this,
I lease it to here.
This is going to lease it out over here
to the short-term rental people.
So it's an expense.
So 5k comes back to here.
That 5k that comes back to here since I've leased it
to the corporation, that's not subject to employment taxes
because my LLC is not engaging in short-term rental.
What is it doing?
It's in a long-term lease arrangement.
We call this a master lease.
It's a special lease we put together.
It's in a special lease arrangement
on a long-term basis with that corporation.
So that turns that ordinary short-term rental income,
active business income, into ordinary income.
Ordinary rental income.
Passive income.
So now we've got 5k here at 15%.
What you're gonna do is you're gonna save
$750 a month in taxes by using this strategy.
Just calculate that out.
You know over an entire year, you're gonna be saving
close to $9,000 in taxes by this one simple strategy.
By entering into a master lease arrangement
with your corporation.
Your corporations gonna make $2,000 up here.
What are you gonna do with that?
You're gonna spend it.
You're gonna find ways to pull that money out.
My partner Toby Mathis, he teaches a number of great courses
on taxation for rental real estate investors.
He also has a class every other Tuesday called Tax Tuesday.
If you're not signed up for that,
I highly encourage you to go
to our website andersonadvisors.com.
Look for Tax Tuesday and get registered for Tax Tuesday.
You should be on that call.
Cause this is the type of stuff we're gonna be covering.
How you can save on taxes for your rental real estate.
But hey, that's it right there.
You wanna protect your Airbnb to lower your taxes
and protect those assets, set-up a master lease arrangement.
If you don't own the property, no problem.
Still use the corporation.
Here's a property down here somebody else owns.
Enter into a lease arrangement
with the third party for their property.
Sublease it back out.
You are in business.
You're makin' money and you're not overpaying in your taxes.
My names Clint Coons with Anderson Business Advisors,
and in this segment we covered Airbnb investing.
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